United States President Donald Trump sent the oil markets into turmoil following a confirmation that he was pulling out of the Iran Nuclear Deal.
As at Wednesday evening, Brent Crude prices were up 2.5% to $77 per share. As you may very well know, the Nigerian economy is nearly perfectly correlated to the price of crude oil. Thus, if there is any section of the Nigerian economy that reacts first to good or bad economic outlook, then that section is the Nigerian Stock Market.
If the Nigerian Stock Market is expected to gain from the rise in crude oil prices, then surely, there are stocks listed in the exchange that could also gain. Let’s look at a few possible beneficiaries of a rising oil price.
Seplat Petroleum Development Co Plc
Seplat operates in the upstream sector and makes money producing and selling crude oil. Its share price is one of the best performers, gaining 19.77% year to date. Seplat currently trades at a price earnings ratio that is less than 4x.
Not one of our favourite stocks, but you can’t deny the fact that higher oil prices positively affect the share price of Oando. With the oil prices up, some of the impairments they took on the ConocoPhillips asset could be reversed into profits.
Stocks have been mostly bearish in May but there are reasons to believe that things might turn positive. Oando currently trades at an earnings per share of 10x and turned a profit at the end of 2017. However, the focus must be on the results of the company, not the group, which according to its results, is still struggling.
Julius Berger Nigeria Plc
You might be wondering what this stock is doing on this list. Though not an oil and gas stock, Julius Berger also has a positive correlation with the price of oil.
The company relies heavily on government contracts to drive up revenues. Higher oil prices mean more money for Federal and State Governments that can now spend on roads and other construction projects.
The Chinese might have something to say about this, but with the local content law on their side, we won’t bet against Julius Berger.
All eyes are on Tier 1 banks like First Bank, UBA, GTB, Access Bank and Zenith Bank. Banks don’t receive government deposits any longer, no thanks to the TSA. However, banks have a stake in what happens in the oil sector.
A huge part of bank loans that were written down as loan losses over the last two years were oil and gas related ones. The Central Bank forced banks to take provisions as oil prices crashed. Now that prices are back up, the value of these loans will be improved due to the effect of higher oil prices.
Obligors of these banks rely on oil prices to drive up revenue and even raise capital for more investments. This places banks squarely on the line of performing loans increasing their returns.
Fuel is still a largely subsidised product in Nigeria and margins are nothing to write home about. However, lubricants, diesel and cooking gas are deregulated products.
Being by-products of crude oil, we don’t doubt the positive effect this could have on the earnings of downstream players like Forte Oil, Mobil, Total and Conoil.
We will be watching these products closely to see if prices increase any time soon. If they do, then expect that to flow to bottom line and possible share price appreciation.